U.S. 199A Qualified Business Income Deduction Introduction
Many individuals, including owners of businesses operated through sole proprietorships, partnerships, S corporations, trusts and estates may be eligible for a qualified business income deduction, also called the section 199A deduction, for years beginning after December 31.
The deduction allows them to deduct up to 20% of their qualified business income (QBI), plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. Income earned by a C corporation or by providing services as an employee is not eligible for the deduction.
The deduction has two components.
- QBI Component. This component of the deduction equals 20% of QBI from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate. Depending on the taxpayer’s taxable income, the QBI Component is subject to limitations including:
(1) The type of trade or business,
(2) The amount of W-2 wages paid by the qualified trade or business, and
(3) The unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business.
These limitations do not apply to taxpayers with taxable income at or below a certain threshold. For 2019, the threshold amount is $321,400 for a married couple filing a joint return, and $160,700 for all other taxpayers.
- REIT/PTP Component. This component of the deduction equals 20% of qualified REIT dividends and qualified PTP income. This component is not limited by W-2 wages or the UBIA of qualified property. Depending on the taxpayer’s taxable income, the amount of PTP income that qualifies may be limited if the PTP is engaged in a specified service trade or business.
The overall deduction is limited to the lesser of the QBI component plus the REIT/PTP component or 20% of the taxable income minus net capital gain. The deduction is available regardless of whether an individual itemizes their deductions on Schedule A or takes the standard deduction.
QBI does not include any of the following:
- Items not properly includible in income, such as losses or deductions disallowed under the basis, at-risk, passive loss, or excess business loss rules.
- Investment items such as capital gains or losses, or dividends.
- Interest income not properly allocable to a trade or business.
- Wage income.
- Income not effectively connected with the conduct of business within the U.S.
- Commodities transactions or foreign currency gains or losses.
- Income, loss, or deductions from notional principal contracts.
- Annuities (unless received in connection with the trade or business).
- Amounts received as reasonable compensation from an S corporation.
- Amounts received as guaranteed payments from a partnership.
- Payments received by a partner for services other than in a capacity as a partner.
- Qualified REIT dividends.
- Qualified PTP income.
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